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Bank organization and screening performance
This paper develops a simple model of organization design for a bank by modifying the model by Sah and Stiglitz (1986). Two alternative forms of bank organization are considered. In the "single-layered" organization, each loan candidate is screened only once. In the "double-layered" organization, loans are screened twice and have to be accepted by two independent decision units. It is shown that the single-layered organization originates more loans but its portfolio includes a higher proportion of bad loans compared with the double-layered organization. The profits for a bank with single-layered organization are higher than that with double-layered organization if (a) the quality of initial portfolio is high, (b) the problem of Type I error is serious, (c) the problem of Type II error is small, and/or (d) the screening cost is high. When the bank optimally chooses the intensity of screening, given the organizational structure, the bank with single-layered organization chooses a higher level of efforts to improve the screening skill. The preliminary empirical analysis suggests that the model is consistent with the recent experience in Japanese banking.
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More About This Work
- Academic Units
- Center on Japanese Economy and Business
- Publisher
- Center on Japanese Economy and Business, Graduate School of Business, Columbia University
- Series
- Center on Japanese Economy and Business Working Papers, 110
- Published Here
- February 9, 2011